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Are Startups Facing a Series A Funding Crunch?

March 29, 2013 –
The headlines about Series A funding for startups can be confusing. Do startups have a funding crisis or not?

While a law firm’s report shows a Series-A funding cataclysm mostly in the Silicon Valley, headlines emanating in southern California tell a different story.

Series A funding is the first round of financing for a startup that’s generating revenue, but not making a profit.

In such early stage investments, the risk is usually funded by venture capital funds or angel investors.

The 2013 study by Fenwick & West showing a funding shortage was authored by Barry J. Kramer and Steven S. Levine in Mountain View, CA.

They’re partners in the technology and life sciences law firm.

Here are excerpts from the study:

Of the companies funded in 2011, 27 percent had raised a Series A financing by the end of the following year (2012), while 45 percent of the companies funded in 2010 had raised a Series A financing by the end of the following year (2011).

Conversely, 23 percent of the companies funded in 2011 raised follow-on seed financing by the end of the following year, while 12 percent of the companies funded in 2010 had raised a follow on seed by the end of the following year.

The percentage of companies in our survey receiving seed funding that were software companies increased from 25 percent in 2011 to 34 percent in 2012, while the percentage of such companies that were internet/digital media companies declined from 75 percent to 66 percent.

Series A funding headlines

But farther south in California, there were seemingly conflicting headlines, for example:

“Playdek Inc. Raises $3.8M in Series A Funding.” The Carlsbad gaming publisher, Playdek, announced it raised the funding from Qualcomm Ventures. Playdek’s games are produced for Apple.

“ZeaKal Raises $3.8M in Series A Funding.” Zeakal is a San Diego-based plant science company that can now really focus on improving crop yields for rice, soybeans and other crops.

A primer – what’s going on?

“Yes, we are experiencing difficulty with some early-stage companies finding their Series A funding,” explains Joey Tamer in an e-mail. “But this is not new. Years ago, in other boom times, I called it the ‘Series B gap’ but never publicized it.”

Joey Tamer

Ms. Tamer is widely acclaimed as a strategic consultant to entrepreneurs in technology and digital media, and to experienced consultants in all fields to maximize their practices (www.joeytamer.com).

“Here is the condition: In times when there is a lot of capital for investment, and stable technology platforms that encourage lots of entrepreneurs to build new products and companies on those platforms, the very-early capital comes in to those new companies rather easily – before the product has to prove itself in the marketplace,” she wrote.

What about now?

“At this moment (2013), there are more early-stage funding vehicles than ever: Incubators, accelerators, super angels, angel groups, boutique venture capitalists, and so on,” Ms. Tamer pointed out. “The current capital market encourages established venture capitalists to invest earlier than they have before, to make sure they get in on the action (and because there are so few other investment vehicles that can create an ROI).

Then what?

“Then the company moves its product into the marketplace, and is ‘early stage’ but not a ‘startup’ – and the criteria for investment is now focused on ‘market traction’ – read, real sales, real revenue, sustainable growth,” she added. “At this point, many of the companies funded on their ‘concept’ and their ‘minimally viable product’ (MVP) fail to reach even the lowest benchmarks of market traction. And so they do not get the next round of capital – the $2M or $5M that lets the company create that traction, and go on to the next round ($10M -$20M) that allows it to scale.”

Why all the publicity?

“The reason we are hearing about the Series A crunch (rather than the Series B gap) is because there are so many new kinds of seed rounds ($20K-$50K from accelerators, followed by $500K – $700K from angels) that the real definition of Series A has morphed, and in fact is confused in its usage,” explained Ms. Tamer.

Conclusion

“The trend is the same as always – getting real capital for proof-of-market and subsequent scaling of a company has always been difficult,” she concluded. “Just now, there are many more startup companies with seed capital, and the same (small) number of those successfully penetrating their markets.”

“If you want something new, you have to stop doing something old”

-Peter F. Drucker

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Author Terry Corbell has written innumerable online business-enhancement articles, and is a business-performance consultant and profit professional. Click here to see his management services. For a complimentary chat about your business situation or to schedule him as a speaker, consultant or author, please contact Terry.